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ROLLING BACK SOPS RBI THE NEXT THREAT

Indraneel Sen Gupta 
on 19 September 2009

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Its time for getting back of stimulus package benefits and face some real hard core business battle.
 
The money market is gearing up to face the next punch to be delivered by the Reserve Bank of India (RBI) against inflation.
 
The RBI have said that the inflation will touch 6% by march 2010.It increased the forecast from 5% declared in July 2009.So higher inflation will make the RBI to squeeze liquidity. This activity of RBI is very much know and its effect. But now this ball dance game will be different.
 
The Reserve Bank of India (RBI) has slashed its benchmark lending rate by 425 basis points since last October, pumping massive liquidity into the markets as the global downturn hit Asia's third-largest economy harder than expected.
Now in this scenario the RBI will roll back all its monetary relaxation. It is the excise and service tax cuts amounting to Rs 30,000 crore that may be reviewed first. . The Reserve Bank of India (RBI) will continue with its intervention measures both in the foreign exchange and domestic money market
The next one will be increasing the lending rates. This will create more pressure on the companies Bottom line cost. The days of cheap loans will be over not only for corporate but also for retailers. Real estate will feel the first punch of the roll back of the lending rates. At an individual level, it will increase the EMI (equated monthly installment) payments of homeowners who have mortgages on floating rates of interest.
 
The root cause of 6% inflation will be  the commodity prices. When RBI and the govt will roll back the stimulus, this will damage the industrial along with the Export decline and that will take long time to recover. It is possible that costly credit is going to hit those very sectors where supply needs to rise. So by the next year we will face again some growth accelerating which is not suitable until the Export revives back. When export will revive it would be better to roll back the sops. Until then the RBI and govt should maintain the current sops. Only looking at some figures for some months will not make the decision of rolling back of sops an ideal game plan. The govt should try to control and measures the discrepancies reduce them in the inflated commodity prices. Moreover the calculation of inflation process is also very old which needs some changement.
 
Rolling back of sops is not the ideal game to control inflation.



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